Current Global Economic System
Current Global Economic System
In the mid-twentieth century, economists believed that spurring economic growth would translate into higher living standards and wealth distribution in all sectors of the economy. This claim hinges on the fact that during the 1950s and 1960s, virtually all groups in industrialised countries were advancing, while even the individuals in the lower income bracket were also experiencing rapid growth (Stiglitz,2016). However, in the preceding decades, the trickling-down effect of the growing wealth among the rich was not felt by the poor, as they started to divert their earnings into personal property. This triggered the increase in inequality between the rich and the poor, a situation that was made worse by government policies that gave tax relief to the rich. This has been the case even in the 21st century. The premise of this essay is to argue in favour of the claim that the current economic system is fixed in favour of the rich.
The global economic system continued to expand at an uneven pace during 2015, a modest expansion attributed to the adjustments made by various governments on their national economies in the wake of the 2008/09 global financial crisis. Most of the people affected by the crisis were the middle class and the have-nots since the economy created obstacles to opportunities and denied them a chance to open new businesses and finance their investments.
According to the organisation Economy Cooperation and Development (OECD) in Paris, the rich are at the upper end of the income and receive far more wealth than those at the lower end. In 2014, a report from the OECD revealed that income inequality had increased significantly in the past three years in 2010 than in the previous twelve years. The increase was high, especially in the countries that had been mostly affected by the global economic crisis.
Research carried out by the Organisation Economy and Development shows that more than half of the population in 100 countries around the world believe that the gap between the wealthy and the poor continues to rise and is a big problem for society. The gap is particularly pronounced in developing economies, where 63% identify inequality as the biggest issue. People are broadly convinced that the difference between the rich and the poor has risen significantly in the past ten years. Again, this rise in inequality is prevalent in developed countries where 75% believe that the economy is getting worse. The public in the United States and China seem to be in agreement that the current economic system favours the rich and is not fair to the poor (Andersen et al., 2015 p.120). Amidst the growing concerns about the rising levels of inequality globally, the majority in many countries believe that narrowing the gap between the wealthy and poor should be the government’s priority. Piketty (2014) opines that “creating more employment opportunities is overwhelming the priority of public in advanced economics and a strong priority in developing countries as well. In emerging markets, publics are split over whether the priority should be jobs or curbing inflation.” (p.135).
In the United States, a substantial majority (about 70%) of the population believes that the current economic system “unfairly favors powerful interests.” (Acemoglu et al., 2015). There are differences in this view between the Republicans and the Democrats. Democrats are of the view that the economic system is unfair, while Republicans are split over the view, with 50% percent being of the view that the system is for the powerful, while the other 50% believe that the economic system is fair to all. The richest 2% have more wealth than the world combined, with Acemoglue (2015) opining that power is being used to skew the current financial system to increase the gap between the rich and the have-nots.
The gap is further increased by a global network tax system that enables the rich to hide $7.6 trillion, according to the findings of research conducted by Oxfam International. Meanwhile, the wealth owned by the poor has fallen significantly by a trillion dollars in the past ten years (Oxfam International, 2017). More research by Oxfam shows that 62 individuals own the same wealth as 4.3 billion people, the figure decreased from 388 individuals in 2010 (Bennet et al., 2014). The wealth of the 62 people had increased by 44% over the past five years while that of the poor fell by 41% over a trillion dollars since 2010. Our economic system is substantially skewed for the rich and is still increasing. Income is being sucked by the wealthy; managers ensure that wealth stays far from the reach of the ordinary people and their governments (Owen 2016 p.107-127). The $7.6 trillion of personal wealth held offshore by the rich is more than the Gross Domestic Product (GDP) of the UK and Singapore. The current economic system has taken different forms that have brought significant change in the financial system, one of these forms neoliberalism (Citrin et al., 2013 p.858-881).
Neoliberalism is a body of economic theory that claims that a free-market economy supports the idea of free individual choice and also leads to optimum economic performance on distributional justice and technical progress. For two decades, neoliberalism dominated economic policymaking in the United States and the United Kingdom; the United States has managed to impose neoliberal policies, especially in third-world countries through the World Bank (Dollfsma et al., 2013). From around the 1930s to the mid-1970s, a new “interventionist” approach replaced classical liberalism and became accepted as a belief that capital required that state regulation be viable (Hollingworth et al., 2015). The main ideas in neoliberalism are the deregulation of business, privatization of public assets, and a reduction of taxes on businesses and the middle class (Masera et al., 2010). In the global market, these policy advocates for the free movement of goods and services across national boundaries. That is, individuals are free to invest, move and acquire property around the world.
The other economic form that the current economic system is taking is trickle-down economics; this theory is based on the idea that wealth from the rich should trickle down to the poor. The trickle-down aspect involves tax cuts on capital gains, high-income earners, and businesses (Milanovich, 2014). Trickle-down economics is based on the assumption that investors and company owners are the real drivers of growth; they use the extra cash to expand their businesses and buy more enterprises or stocks. Banks increase lending to businesses, investors continue expanding their operations and hiring workers, these workers spend their salaries, and in the end, demand increases leading to economic growth. The trickle-down theory is similar to supply-side economics. However, it is more detailed because it involves targeted tax cuts to capital gains and corporates. Both use the Laffer curve to actualize their theories. Arthur Laffer from the University of Yale showed that tax cuts provide a powerful multiplication effect, they create enough growth that replaces lost government revenue. However, Lafer also warned that tax cuts work best when taxes are in the “prohibitive range.” (Lafer, 2004). Otherwise, they will lower the government revenue without stimulating economic growth.
States have set rules and regulations to control the aggregate indicators of an economy, on the policy that has been implemented is the monetary policy which involves the management of the market economy by the central bank. Government authorities regulate the acquisition of loans by ensuring that the applicant has bank approval from the state authority. Another regulation is the fiscal policy; this policy involves the revenues and expenses Roys et al., 2014 p.4-5). Revenues are formed mainly by financial charges imposed on individuals or legal entities by a state. The policy involves the increase in government purchases of goods and services and the decrease in net taxes or combining the two to expand real output and increase aggregate demands. However, the government can also reduce the purchase of goods and services and raise taxes to control inflation by decreasing total demand.
Corporations are characterised by a network of independent interests and departments, each contributing to the performance of the business and anticipating the benefits. Companies create wealth in different forms, many investors have opted to involve themselves in the corporation form of the enterprise because it can amass capital from many sources and spread financial risks to create wealth (Roys et al., 2014). The flexible variants of a corporation have proven to be uniquely appropriate and fruitful in accomplishing a business’s objectives. The current economic system operates on market principles and provides many opportunities for the creation of new organisations and the development of firms.
The corporate system calls for great managerial skills and attention to the demands and interests of individuals from different groups who are directly or indirectly affected by the corporate to achieve great success. Joseph E. Stiglitz, a winner of the Nobel Prize in Economic Sciences in 2001, stated that the absence of stronger fiscal stimulus would lead to a slower recovery from the great recession in 2008 (Stiglitz, 2014). He emphasized that global inequality was crucial and had to be addressed to avoid greater political consequences. Thomas Piketty observed that though the economy is not growing, capital is accumulating (Piketty, 2014). The economy is dwarfed by speculative and non-productive capital because more income accumulates around the wealthy, leaving the poor with close to nothing to share among them.
The current global economy is entirely for the rich; 90% of capital gained from businesses end up with the 1% wealthy population, while the rest of the 99% continue to remain in poverty. However, governments have taken certain radical steps to deal with this global economic crisis, by implementing policies that regulate capital distribution and imposing tax cuts from company owners and investors and this has enabled income to be shared equally among the ordinary people and the wealthy.
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